top of page
  • Writer's pictureMCDA CCG, Inc.

Recent Changes in Tax Laws and Their Implications for Businesses

Tax laws are constantly evolving, and businesses must stay informed to optimize their tax planning and ensure compliance. Recent changes in tax legislation have introduced new rules and adjustments that can significantly impact how businesses manage their finances. Here, we discuss some of the key recent changes in tax laws and their implications for businesses.

1. Corporate Tax Rate Adjustments

One of the most notable changes in recent years has been the adjustment of corporate tax rates. The Tax Cuts and Jobs Act (TCJA) of 2017 reduced the federal corporate tax rate from 35% to 21%. While this change initially provided substantial tax relief for many businesses, subsequent legislation has introduced further modifications.

Implications: Businesses need to reassess their tax strategies to align with the current tax rate. The reduction in corporate tax rates can lead to increased after-tax profits, which can be reinvested into the business for growth or distributed to shareholders. However, businesses must also monitor any potential increases in rates proposed in future legislation.

2. Deductions and Credits

The TCJA also made significant changes to deductions and credits available to businesses. For example, it introduced a limitation on the deductibility of business interest expenses and modified depreciation rules, including the ability to fully expense certain capital investments.

Implications: Businesses should maximize the use of available deductions and credits to reduce taxable income. The limitation on interest deductions requires careful management of debt and financing strategies. The changes in depreciation rules encourage businesses to invest in capital assets by allowing immediate expensing, thus reducing taxable income in the year of purchase.

3. Pass-Through Business Income Deduction

The TCJA introduced a new deduction for qualified business income (QBI) from pass-through entities, such as S corporations, partnerships, and sole proprietorships. This deduction allows eligible businesses to deduct up to 20% of their QBI, subject to certain limitations and thresholds.

Implications: Owners of pass-through entities should evaluate their eligibility for the QBI deduction and understand the specific limitations and requirements. This deduction can significantly reduce the effective tax rate on business income, enhancing cash flow and profitability.

4. Net Operating Loss (NOL) Carrybacks and Carryforwards

Recent changes have altered the treatment of net operating losses (NOLs). The CARES Act temporarily allowed businesses to carry back NOLs from 2018, 2019, and 2020 to the previous five tax years, providing immediate tax refunds. However, the TCJA had originally limited the carryback of NOLs and introduced an indefinite carryforward period with an 80% limitation on taxable income.

Implications: Businesses experiencing losses should explore the benefits of carrying back NOLs to obtain refunds for taxes paid in previous years. The indefinite carryforward provision allows businesses to use NOLs to offset future taxable income, but they must plan for the 80% limitation.

5. Research and Development (R&D) Tax Credit

The R&D tax credit remains a valuable incentive for businesses investing in innovation. Recent changes have clarified and expanded eligibility criteria, making it more accessible for small and medium-sized businesses.

Implications: Businesses engaged in qualifying research activities should ensure they are taking full advantage of the R&D tax credit. Proper documentation and understanding of eligible expenses are crucial for maximizing the benefits of this credit.


6. Global Intangible Low-Taxed Income (GILTI) and Base Erosion and Anti-Abuse Tax (BEAT)

For businesses with international operations, the TCJA introduced new rules to address profit shifting and base erosion. The GILTI provision requires U.S. shareholders to include in their income certain low-taxed foreign earnings, while the BEAT targets large corporations that make deductible payments to foreign affiliates.

Implications: Businesses with international operations must reassess their global tax strategies to comply with GILTI and BEAT provisions. This may involve restructuring operations, revisiting transfer pricing policies, and exploring opportunities to mitigate additional tax liabilities.

Conclusion

Recent changes in tax laws present both opportunities and challenges for businesses. Staying informed and proactive in tax planning is essential to navigate these changes effectively. By understanding and leveraging new rules, deductions, and credits, businesses can optimize their tax positions, enhance cash flow, and ensure compliance with evolving regulations.

Comments


bottom of page